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A Risky Business: How to Mitigate Risk-Pricing in Your Outsourced Contract

by ISG

Service providers do not have a universally accepted approach for handling risk in their pricing models. But we know that complexity and uncertainty drive risk, and the higher the risk, the more you pay. The degree to which you can identify and handle these risks will directly influence the price you pay for outsourced services.

To ensure that you benefit from the best market prices for all your outsourced services, ISG recommends a keen focus on removing risk from outsourcing deals. These Top 5 points identify ways to reduce the level of complexity and uncertainty, and therefore, the key drivers of risk.

1. Buy standard services wherever possible. Risk is a reality when you are buying non-standard services. Standard services, which are well-defined and predictable, are available from most IT service providers through a price book, rather than a custom-built and often complex financial model. Before any major outsourcing venture, take time to understand the IT requirements of the business, and value any non-standard services or constraints so you can make a decision based on its relative importance when compared to the market standard.

2. Follow a clear process. Being clear and engendering trust in a process reduces uncertainty in the mind of the person responsible for pricing the services. Be specific and consistent in your communication about the Request for Proposal (RFP) process, and ensure you understand and support the service provider’s due diligence requirements.

3. Articulate service requirements in terms of outputs. Describe your service requirements, or the “what,” in output-based terms, and let your service provider worry about the “how.” In addition to allowing the service provider greater control to leverage economies of scale across multiple clients, you are removing a layer of complexity in the solution.

4. Understand your business demand. Because many IT organizations don’t fully understand the business needs that the outsourced IT services must fulfill, they often focus on installed units rather than utilized services and have to “re-baseline” their volumes during the outsourcing process. Constantly updating volumes part-way through a sourcing transaction can heighten confusion and uncertainty. Understand your consumption of IT services: the number of active devices, utilized ports and the amount of occupied storage. If you don’t already measure your consumption, start measuring it, and return to the business units to ensure it is what they really need today and in the future.

5. Fight for the “A-Team.” Every organization has a group of people who they consider to be the best – the “A-team.” These employees bring with them experience, certainty and confidence in a solution and price. To get the best team assigned to your organization, approach the right service providers for specific IT service bundles. Your service provider must want your business and consider you an important client. Conduct a market analysis, and initially spread the net wide to test the appetite of potential service providers. Then ask for the A-Team. If you don’t ask for it, you won’t get it.

For more information on how to reduce risk in your outsourced contracts, contact Jessica Kane or Robyn Singlehurst.